NQ Mobile Sales Search Leads to Suburban Beijing Office

Apps produced by NQ Mobile Inc. are seen in an arranged photograph. About 60 percent of Yidatong’s sales come from NQ Mobile Inc., with the rest coming from developers and game content providers that “Rachel” Xu Rong, owner of Tianjin Yidatong Technology Development Co. and Jiuhe Tianxia Beijing Technology Co., declined to identify. Photographer: Brent Lewin/Bloomberg

Nov. 4 (Bloomberg) -- NQ Mobile Inc., ensnared in
allegations of fraud, employs a company that has 15 workers
sitting in the corner of a suburban Beijing office registered in
the name of another business.

Whether that arrangement contributed to “massive fraud,”
as research firm Muddy Waters LLC has asserted, or simply
illustrates the local idiosyncrasies of young tech companies
doing business in China is at the heart of a dispute that has
tanked the fast-growing maker of mobile-phone security software.
The stock fell 62 percent in the three days after the fraud
allegations emerged last month and was down 44 percent through
Nov. 1.

As both sides dig in their heels, outsiders are trying to
square the allegations with what they know about NQ, until now a
high-flier that has flourished under its Massachusetts Institute
of Technology-educated co-Chief Executive Officer Omar Khan.

Tianjin Yidatong Technology Development Co., the company at
the core of Muddy Waters allegations against NQ, runs a mobile-payments service, collecting revenue for NQ from corporate
customers and consumers. It shares office space with another
company, said Xu Rong, who owns both businesses. Yidatong
provided at least 21 percent of NQ Mobile’s revenue in each of
the past three years, its largest source of business, according
to NQ Mobile filings.

‘Empty Shell’

In an Oct. 24 report accusing NQ Mobile of fraud, research
firm Muddy Waters called Yidatong “an empty shell with no
discernible operation” and “clearly a company trying not to be
found.” Muddy Waters said it reached that conclusion after
visiting 10 addresses registered to Yidatong that turned out to
be empty or non-existent. The building with Xu’s two companies
wasn’t on that list.

Yidatong says Muddy Waters never contacted the company to
ask for Yidatong’s address before issuing its report. Xu
explained that the 10 addresses were “virtual offices” to
comply with Chinese regulations that companies have a registered
address in each region where it processes payments.

“The report is not correct, it’s not accurate,” Xu said
in an interview at the office building, situated across from the
Fairyland Hotel. “I don’t think it’s difficult to find me.”

NQ Mobile supplied the address to Bloomberg after Muddy
Waters went public with its allegations. The 15-story building
in a business park 21 kilometers (13 miles) southwest of Beijing
is Yidatong’s “main operating facility,” NQ Mobile said.

‘Chinese Characteristic’

About 15 of Yidatong’s workers sit on the third-floor,
sharing space with nearly 200 workers for the second company,
Jiuhe Tianxia Beijing Technology Co., which operates an online
gaming site called 9hgame.com. Xu described the effort to lower
costs by locating the sister companies together as a “Chinese
characteristic.”

“It’s a way of reducing costs,” Xu said. “I’m the boss
of 9H and I’m also the boss of Yidatong. If you cannot find
Yidatong, you can find me at 9H. I’m here.”

The building directory contains no listing for Yidatong,
and two guards at the first-floor security desk said they’d
never heard of the company. When asked about the discrepancy,
Michelle Ma, director of investor relations for NQ Mobile, said
Yidatong’s third-floor office is under the name of Jiuhe.

60% Plunge

Yidatong’s business is collecting payments from buyers of
wireless content and passing those payments on to content
creators, whether makers of mobile games or, in NQ’s case, anti-hacking software. About 60 percent of Yidatong’s sales come from
NQ, with the rest coming from developers and game content
providers that Xu declined to identify.

Muddy Waters called Yidatong “a sham counter-party” that
is secretly controlled by NQ for the purpose of inflating its
own sales figures.

“There’s no way to falsify the revenue,” Xu said. “I’m
not NQ Mobile’s customer, so it’s not like he can sell me
something for 100 yuan and say he charged me 200 yuan. It’s not
possible. My function is a channel.”

Carson Block, the Muddy Waters founder whose short call
prompted NQ to sink more than 60 percent in a span of about 54
minutes on Oct. 24, said in a Bloomberg Television interview on
Nov. 1 the stock will be delisted within a year. “Over 90
percent of the revenue doesn’t exist,” he said.

‘Absolutely Absurd’

The Muddy Waters research reports contends Yidatong is
“incapable of processing meaningful amounts of payments on
behalf of NQ because it does not have even one employee
regularly present” to carry out such basic responsibilities as
turning on the lights, answering phones or ordering office
supplies, according to Muddy Waters.

Co-CEO Khan said Block’s prediction of delisting is
“absolutely absurd” in a separate Bloomberg Television
interview on the same day.

Even if NQ succeeds in fending off the allegations, Khan, a
former Samsung Electronics Co. rising star, may have a tough
time pulling his company out of its tailspin. The result may be
NQ becoming an acquisition target. “If they are able to prove
they are not culpable, but they are damaged stock, someone could
get them on the cheap,” said Michael Mahoney, senior managing
director at Falcon Point Capital LLC in San Francisco.

Business Dealings

Muddy Waters also cited that Xu Rong is a former NQ
employee, as well as having business dealings with NQ Mobile co-founder Xu Zhou, as evidence NQ actually controls Yidatong.

Xu said Yidatong is independent of NQ and there is no
relationship besides the contract for mobile payment support.
She said she worked for NQ for seven months in 2008.

She added that she has been friends with Xu Zhou, one of
NQ’s three co-founders, since 2003, when they worked together at
Wanxiang Communications Co. She confirmed that he’s an “angel
investor” in Jiuhe Tianxia, whose office houses Yidatong. She
declined to disclose the size of Xu Zhou’s Jiuhe Tianxia stake
and said it was personal and separate from NQ.

“They made a simple thing complex,” she said of Muddy
Waters. “All of our cooperation has been disclosed by NQ.”